A Budget for Uncertainty?

Most of the political interest around the Welsh Government’s draft budget has inevitably centred on the deal with Plaid Cymru. But in fiscal terms, there was another story. The Cabinet Secretary for Finance and Local Government called it a ‘budget for stability and ambition’. It might also have been called a ‘budget for uncertainty’.

The uncertainty about the content of the Chancellor’s coming Autumn Statement and, probably as significant, what the Office for Budget Responsibility will say on the same day about the impact of Brexit on future tax revenues and inflation, clearly influenced the decision to go for a 1-year Resource budget (day-to-day spending on public services) and to carry a larger than usual reserve.

Given that negotiations about the future Welsh fiscal framework are also underway, in the context of the controversy about the current Wales Bill, the fog is even more dense than usual.

There are no obvious signs of the Treasury carrying out a major review of its existing resource departmental spending plans for the Autumn Statement; such runes as there are suggest that any ‘fiscal reset’ is more likely to centre on capital spending and rescheduling the timeline for achieving a budget surplus. Paradoxically, although the Welsh draft budget has also set a 4-year capital plan, changes in the light of the Autumn Statement in that plan seem more likely.

But we need to be cautious about how far the Autumn Statement can resolve the fiscal uncertainties. Given the turbulent economic territory we are entering as Brexit takes shape, next Spring’s UK Budget could be at least as crucial.

The bottom line for the Welsh draft budget is more or less in line with the 2015 UK Spending Review as adjusted in Mr Osborne’s last budget. The fiscal Resource DEL (spending limit) is £13 billion for 2017-18, about 1.8% higher in cash terms than the budget for 2016-17[1], so roughly flat in real terms. As the recent report we commissioned from the Institute for Fiscal Studies showed, current Treasury plans suggest that this figure is likely to show a noticeable real terms cut over period 2018 – 2020.

As always, the detail in the budget has prompted various reactions. For example, there has been a welcome for retaining the Supporting People provision, a holding response on changes in the higher education budget and questions about a capital cut in regeneration. Increases in the Pupil Deprivation Grant had already been announced as had the intention to develop successor arrangements for Communities First. But the biggest change is in the NHS allocation.

The pattern of the NHS taking a growing share of the Resource DEL[2] is continued in the draft budget. The announced £ 274 million increase means that the NHS will be receiving 50.5% of the total in 2017-18 compared with 48.1% 2015-16 (excluding depreciation). The real terms increase over the period of 3.5% is not substantially out of line with England although the spend per head in Wales is higher. But it underlines the conundrum of how to respond to NHS cost and demand pressures without squeezing the total available for all other services. The challenge will be to ensure that the drive for greater NHS efficiency and new approaches to delivering care is incentivised and sustained. The recent Health Foundation analysis implies the need for £0.5 billion NHS efficiencies over the next 5 years.

A characteristic of the Welsh budget has been a more balanced approach to funding across public services than England. The local government settlement includes a small cash increase in revenue funding though still a real terms cut. This is enabled by a rise in business rate income which offsets a cut elsewhere. As a whole, the increase is better news for local authorities compared with recent trends but there are still challenges.

The draft budget, in line with previous Welsh Government budgets, acknowledges that there are growing pressures on social services. Wales has so far avoided the kind of social care melt-down which observers fear in in England, but the future looks testing. The Health Foundation is projecting that spending on adult social care in Wales will need to rise by about 4% a year in real terms if it is to keep pace with demand. One of the big question marks is the impact of the national living wage.

One way or another, it looks as though the budget pressures on many local services and grants are set to continue, emphasising the need to find other ways of delivering the outcomes which all public services seek.

We will report in more detail on Welsh budget prospects after the Autumn Statement. For the moment, this is a budget which is primarily about holding the line, within tight fiscal constraints, while the dust settles. But this may not be any time soon.